The great fall of Wall Street, usa and the meltdown of stock markets the world over including India’s bellwether Sensex of the Bombay Stock Exchange, which has fallen from the high of 21,000 points it attained in January this year to 8,701 currently, imparts some valuable lessons that need to be debated and discussed within the academic and student communities.
Yet prior to discussing the causes and effects of the great global markets meltdown, it’s important for the academic-student and wider publics to appreciate the value of stock markets and stock exchanges. Because of the predominance of confused Marxist ideology and economics on the campuses of third world countries and Indian academia in particular, too many people tend to equate stock markets with wicked gambling dens and casinos rather than industry and nation building institutions, which need to be strengthened rather than abolished. In their pristine form, stock markets/exchanges are forums where entrepreneurs and businessmen with great ideas and ambition can raise the capital and finance to translate their vision into projects with public participation.
Likewise it’s also important for academia and the student community to appreciate the roles of commercial and investment banks within national economies. The role of commercial banks is to accept people’s savings for safekeeping and lend them forward to companies and small businesses as working capital, i.e. to provide short-term loans and bridge-finance to businesses. The role of investment banks is to propose mergers and acquisitions and invest the savings of high net worth individuals or corporations to earn high returns on capital. The root cause of the great Wall Street crash of 2008 is that the distinction between commercial and investment banks blurred during the past two decades. To justify their six digit salaries and huge bonuses, manage-ments of commercial banks in the US disbursed housing loans estimated at $ 1.4 trillion (Rs.7,000,000 crore — a sum greater than the GDP of India) to millions of people with inadequate capacity to keep paying their monthly installments.
Moreover investment banks purchased such dicey loans of commercial banks on a huge scale and transformed them into CDOs (collateralised debt obligations) or high-yield mortgage-backed securities and sold them to banks and institutions around the world which in turn sold them to investors and mutual funds. But with supply of new homes catching up with demand, the prices of real estate and mortgage backed securities plunged in the US, lumbering high street (commercial) banks with huge inventories of rock-bottom price real estate. Hence a collapse in investor confidence and the global markets meltdown.
This is good time for teachers to reiterate the virtues of fiscal prudence and household saving. Mr. Micawber (of Charles Dickens’ David Copperfield) was right: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” The great global markets meltdown of 2008 proves the enduring validity of this common sense observation.